MORNING VIEW: Markets face setback after China flexes muscle over Hong Kong; metals, equities weaker

Given the dire economic situation as a result of the Covid-19 pandemic, the last thing the global economy needs is an escalation in the United States-China trade war that the latter’s plans to force new national security legislation on Hong Kong could spark.

• Pre-market major western equity indices were weaker too this morning, showing losses of around 1%.
• Oil prices were down by around 5% this morning, with spot Brent crude recently quoted at $34.35 per barrel.
• China will not issue a gross domestic product (GDP) target for 2020 due to the uncertainty the pandemic causes.

Base metals
Three-month base metals prices on the LME were down by between 0.2% for zinc, lead and tin, while aluminium was off by 0.3%. Nickel was down by 0.8% and copper by 1.3% at $5,320.50 per tonne – see table below for more details.

The combination of weakness across the board and relatively high volume bodes ill. 11,712 lots had traded by 5:39am London time.

The most-traded base metals contracts on the SHFE were also down across the board with losses averaging 1.4%, led by a 3.4% in July nickel, while July copper was off by 1.5% at 43,520 yuan ($6,122) per tonne.

Precious metals
The precious metals were also weaker this morning with spot gold prices recently quoted at $1,726.30 per oz, compared with $1,737.05 at a similar time on Thursday morning. The more industrial precious metals were down between 0.8% for platinum and 1.5% for silver.

Wider markets
The yield on benchmark US 10-year treasuries was recently quoted at 0.64%, this after being at 0.66% at a similar time on Thursday – the range in recent weeks has been 0.61-0.71%.

Asian-Pacific equities were weaker this morning: the Nikkei (-0.95%), China’s CSI 300 (-2.29%), the ASX 200 (-0.89%), Kospi (-1.77%) and the Hang Seng (-4.6%).

Currencies
The US dollar index is edging higher and was recently quoted at 99.59, after being around 99.28 at a similar time on Thursday morning – this suggests some haven buying – the range since early April has been 98.54-100.87.

Given the firmer dollar, most of the other major currencies we follow are drifting: the euro (1.0925), the Australian dollar (0.6535) and sterling (1.2213), while the yen (107.44) is firmer, again like the dollar and US treasuries this could be a sign of some pick-up in haven interest.

Key data
Economic data showed Japan fell back into deflation in April with consumer prices falling by 0.2%. The last time the consumer price index (CPI) fell was in December 2017. Data out later includes UK retail sales, UK public sector borrowing requirement and the European Central Bank’s monetary policy meeting accounts.

Today’s key themes and views
We had expected trading in the base metals to become choppy within the overall medium term upward trend, but we thought the choppiness would be driven by developments surrounding the Covid-19 virus. This latest show of weakness has come amid a pick-up in geopolitical tensions – you would have hoped political leaders would work together so as not to rock the boat in these testing times.

Overall, we expect dips to run into support because the reopening of economies should lead to some improvement in demand for the base metals, especially if governments support the recovery by boosting infrastructure spending.

Given the pick-up in geopolitical tensions it is surprising that gold is not firmer, but the broader shift to risk-off may be prompting some initial profit-taking in gold too. We expect gold to remain well supported, unless there are reports of distress selling by central banks.